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https://www.barrons.com/articles/bath-body-works-is-discounting-its-candles-why-thats-not-lighting-up-the-stock-51658343475
Is Bath & Body Works burning the candle at both ends?
The home and personal goods seller is off just 0.7% in afternoon trading, recovering from a steep earlier plunge after lowering its second-quarter earnings guidance and full-year sales outlook, one of a host of retailers to do so.
Given the raft of other downward revisions and the fact that the broader backdrop for consumers has worsened, with inflation at 40-year highs, shareholders were likely already braced for some negative update from Bath & Body Works (ticker: BBWI). The question is whether or not there will be another cut when the company provides its next update, slated to come with second-quarter earnings in August.
Bath & Body Works is one of the retail sector’s worst performers, down 56% in 2022, and with the stock off again today, it’s hard for bargain hunters with a longer-term outlook to ignore.
Yet at the same time, today’s update begs the question about the company’s discounting strategy.
Many retailers are giving up margin gains that they claimed during the pandemic, to the chagrin of shareholders. Still, as BMO Capital Markets analyst Simeon Siegel writes, it doesn’t entirely make sense to promote as much as Bath & Body Works—whose gross margins are back to prepandemic levels—has been just for the sake of clearing out merchandise.
“If Bath & Body Works is seeing such a high dichotomy between high- and low-income shoppers, why not maintain the earned brand elevation and sell less while holding price?” Siegel asks. “What if the issue is simply that many people bought many candles last year? If there was no price elasticity on the way up, maybe there isn’t much on the way down, and it might make sense to give people time to burn their candles and hold price for when they come back rather than fighting to move units at such a material gross margin pressure.”
Contrast that with the approach taken by Yankee Candle owner Newell Brands (NWL).
Chief Executive Officer Ravi Saligram told Barron’s last month that it too was seeing dropping consumption in candles due in part to lower-income shoppers. The company “lost a chunk of consumers who had come into the category with stimulus” funds, a trend that led comparable sales to be “though the roof” for that business last year, he said.
However, he said that the company wouldn’t discount indiscriminately, given that those lower-income shoppers are now focused on paying for food and fuel, with little left over for discretionary items. “Even if we promote our candles significantly, it’s not like we’re going to get [the low-income shopper] back. We have to be careful about promoting.”
Saligram says that doesn’t mean Newell won’t meet customers where they are today—a very different place than in 2021—or use discounts selectively. But “we have to be smart about it,” he says. “When we do promote, it has to be the right products and price points, to make sure we don’t take big hits on margins.”
Newell is down 10.5% this year, and while that’s worse than the Consumer Staples Select Sector SPDR Fund exchange-traded fund (XLP), down 6.3%, the stock has outperformed the S&P 500’s 17.7% decline and the broader retail sector’s 30% loss, as tracked by the SPDR S&P Retail ETF (XRT).
Write to Teresa Rivas at teresa.rivas@barrons.com
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